TDS applicable on Payments to sports associations in the nature of guarantee money intricately connected with the event – SC
TDS or Tax Deducted at Source is income tax reduced from the money paid at the time of making specified payments such as rent, commission, professional fees, salary, interest etc. by the persons making such payments. Any person making specified payments mentioned under the Income Tax Act are required to deduct TDS at the time of making such specified payments. The deduction of tax at source or TDS has been very helpful in the collection of taxes in the country by targeting the source of income itself.
According to Section 194E, where any income referred to in section 115BBA is payable to a non-resident sportsman (including an athlete) or an entertainer who is not a citizen of India or a non-resident sports association or institution, the person responsible for making the payment shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of 20%.
Let us refer to the case of PILCOM v. CIT (2020), where the issue under consideration was whether payments being in the nature of guarantee money made to non-resident sports associations from assessee’s London bank account would be liable to tax in India and whether any income accrued or arose or was deemed to accrue and arise to the non-resident sports associations in India and the liability on part of the assessee to deduct tax at source under section 194E of the Act.
Facts of the Case:
- The assessee was a committee formed by cricket boards of three countries namely India, Pakistan and Sri Lanka for the purpose of hosting the World Cup cricket tournament in these countries in the year 1996.
- The assessee was required to pay varying amounts to the cricket boards of different countries as well as to International Cricket Council (ICC) in connection with conducting the preliminary phases of the tournament and for promoting the game in their respective countries.
- The assessee opened two bank accounts in London which were operated jointly by the representatives of India and Pakistan Cricket Boards where the receipts from sponsorship, TV rights etc. were deposited and expenses were met.
- Based on a mutual agreement, the surplus amount remaining in the bank account was to be divided equally between the cricket boards of India and Pakistan after paying a lump sum amount to the Sri Lankan board.
- Certain amount was transferred to the three co-host countries from the London bank accounts towards paying the fees of the umpires and referees.
- The AO observed that the assessee had made payment to ICC as well as to the cricket control boards of different countries from its two London bank accounts without deducting tax under section 194E of the Act.
- Such payments would be taxable in India as per the provisions of section 115BBA and the assessee failed to deduct tax before making such payments.
- The AO passed an order under section 201(1) holding the assessee liable to pay tax on such amount that it had failed to deduct tax on.
- The AO computed the total short deduction under section 194E to be Rs. 2,18,29,300.
Proceedings of Appellate Authorities and the High Court (HC)
- The assessee filed an appeal before the CIT(A) which was disposed and subsequently an appeal before the tribunal was filed where the tribunal remanded the matter back to the CIT(A).
- In the second round of litigation, the CIT(A) detailed out the actual payments made by the assessee and classified them into seven categories.
- The CIT(A) held that out of the 7 payment categories, 6 categories of payments attracted the provisions of section 115BBA.
- However, for the seventh category of payment being Rs. 1,20,000 transferred from London bank account to Pakistan and Sri Lanka for disbursement of prize money for matches played outside India would not fall within the scope of section 115BBA.
- Further, the CIT(A) observed that only 17 matches out of 37 matches were played in India and thus held that only 45.94% (i.e., 17/37) of the six categories of payments should be considered for the purpose of default under section 201(1)
- The issue before the Supreme Court (SC) was with regard to payments of two categories [guarantee money paid to Australia, England, New Zealand, Sri Lanka and Kenya with whom DTAA’s existed of Rs. 8,85,000 and guarantee money paid to Pakistan, West Indies, Zimbabwe and Holland of Rs. 7,10,000 respectively].
- The Tribunal and HC held that the assessee ought to deduct tax at source in respect of the proportion of the total receipts which bears the same ratio as the number of matches played by each country in India.
- Further, on the issue of applicability of DTAA, though not argued, HC held that irrespective of the DTAA, the obligation to deduct tax under section 194E had to be discharged once income accrues under section 115BBA since such a deduction was not the final payment of tax and could not be said to be an assessment of tax.
- The deduction had to be made and the assessee from whose could get credit of the same once it was found that the income in not eligible to be taxed.
- Further, the HC held that the distinction between the deduction at source by the payer was one thing and an obligation to pay tax was another
Observations of the Supreme Court (SC)
- In the decision of GE India Technology Cen. (P.) Ltd v. CIT , SC held that tax deduction at source applied only to those sums which are chargeable to tax under the Act.
- The expression “chargeable under the provisions of the Act” in section 195(1) was of utmost importance.
- A person paying interest or any other sum to a non-resident was not liable to deduct tax at source if such some was not chargeable to tax.
- In the decision of Vodafone International Holding B.V. , SC held that Section 195 casted an obligation on the payer to deduct tax at source from payments made to non-residents which payments were chargeable to tax.
- Such payments must have an element of income embedded in it which is chargeable to tax in India.
- If the sum paid or credited by the payer is not chargeable to tax then no obligation to deduct the tax would arise.
- Further, in the decision of Eli Lilly & Co (India) (P.) Ltd , SC considered whether tax deducted at source provisions are in the nature of machinery provisions enabling collection and recovery of tax forming an integrated code with the charging and computation provisions which determine taxability in the hands of the assessee.
- SC observed that the non-resident sports associations to whom payments were made as guarantee money had participated in the event where the cricket teams of such associations played matches in India.
- The SC held that such guarantee money paid was intricately connected with the event where various cricket teams were scheduled to play and participated in the event and therefore the source of income was in India by playing matches in India.
- Further, the SC referred to the provisions of section 115BBA(1)(b) which stated that where the total income of a non-resident sports association included any amount guaranteed to be paid or payable in relation to any game or sports played in India, the amount of income calculated in terms of the section would become payable.
- The expression ‘in relation to’ referred in section 115BBA emphasised the connection between the game or sport played in India and the guarantee money paid or payable to the non-resident sports association.
- Once such connection was established, the liability under section 115BBA arose.
- The SC held that the decision of G.E. Technology Centre P. Ltd (supra) had no application to payments covered with regard to guarantee money paid to sports associations as the payments represented amounts which could not be subject matter of charge under the Act.
- On the issue of applicability of the DTAA, SC observed that even though the matter was not argued before the HC, yet it was dealt with by the HC.
- SC concurred with the view of the HC that the obligation to deduct tax at source under section under section 194E was not affected by the DTAA.
- However, where the liability to tax was disputed by the assessee such benefit of the DTAA could be pleaded and the amount in question would be refunded along with interest, but that by itself, would not absolve the liability under section 194E.
Thus, it was concluded by the Supreme Court that the payment made to the Non-resident sports associations represented their income which accrued or arose or was deemed to have accrued or arisen in India and the assessee was thus liable to deduct tax at source under section 194E.